IRA Contribution Limits for 2012 and 2013

Let your investments grow tax-free by contributing the maximum amount allowed to an IRA this year.

As of this writing, we're less than two weeks away from the deadline for 2012 IRA contributions. IRAs, or Individual Retirement Arrangements, are an absolute must in saving for retirement. IRAs allow individuals to save for retirement and not pay taxes on their investments as they grow, but to make proper use of them, you need to know the IRA contribution limits that apply to these tax-favored accounts.

The two basic types of IRAsTraditional IRAs allow your investments to grow tax-free until they are withdrawn. Contributions to traditional IRAs can be tax-deductible depending on whether you have a retirement plan through work and on your income level.

Roth IRAs also allow your investments to grow tax-free; however, contributions are never tax-deductible. The benefit of Roth IRAs is that withdrawals can be tax-free as long as you meet certain requirements.

IRA contribution limitsIf you can save enough to do so, it's well worth it to contribute up to the maximum allowed. However, you should only contribute if you don't foresee yourself needing the money until you retire. You pay a penalty on traditional IRA withdrawals before the age of 59 1/2, except under limited circumstances. Roth IRAs are somewhat freer about allowing withdrawals of your original contributions under certain circumstances, but it's still smarter to keep money within the account until retirement.

You can contribute to traditional IRAs only until you are 70 1/2, while there's no age limit on Roth IRA contributions as long as you have earned income.

The IRA contribution limit is whichever is less: an individual's total earned income or the amount shown in the following table.

IRA Contribution Limits for 2012 and 2013

Under Age 50

Age 50 or older

2012

$5,000

$5,500

2013

$5,500

$6,500

Source: IRS.

Roth IRA contribution limitsRoth IRA contribution limits are the same as for traditional IRAs; however, if you earn more than a certain amount, then you may not be allowed to contribute to a Roth IRA at all, or may only be allowed to contribute a reduced amount. This is based on your filing status as well as your Adjusted Gross Income or AGI.

Author

Dan Dzombak has written for The Motley Fool since 2008. He covers value investing, investing process, and success among other things. You can follow him on Facebook or Twitter by clicking the buttons below or head over to his blog at http://www.DanDzombak.com